Glossary
Personal Guarantee
A personal guarantee is a written promise by an individual, usually an owner or officer, to pay a business's debt personally if the business itself fails to pay.
Most companies that buy on credit are corporations or limited liability companies, which generally shield their owners from the company's debts. A personal guarantee is how a creditor reaches past that shield. By signing a guarantee, an owner or officer agrees to be personally responsible for the company's obligations to that creditor. Guarantees are commonly built into credit applications, leases, equipment financing, and promissory notes.
Because of the statute of frauds, a promise to pay the debt of another generally must be in writing and signed to be enforced. The exact language matters. A guarantee of payment usually lets the creditor go straight to the guarantor once the company defaults, while a guarantee of collection may require the creditor to pursue the company first. Courts also look closely at how the document was signed. A signature followed by a title like 'President' can be argued to be a signature only on behalf of the company, so well-drafted guarantees state clearly that the signer is personally liable, and include a separate signature line in the individual's own name.
Here is an example. A fictional lumber yard, Pine Ridge Building Supply, opens an account for a framing contractor. The owner signs the credit application on behalf of the company and signs a separate personal guarantee section in her own name. Two years later the company closes owing $33,000. Because the guarantee was clearly personal, Pine Ridge can pursue the owner individually, subject to any defenses and the exemptions her state allows.
A personal guarantee matters to a creditor because closed or insolvent companies often have nothing left to collect. A valid guarantee can be the difference between a full write-off and a meaningful recovery. Guarantee rules, including spousal consent and community property issues in some states, vary, so creditors should have their forms reviewed by counsel familiar with the states where they sell.
Example
Pine Ridge Building Supply's credit application includes a separate personal guarantee signed by the owner individually. When the company closes owing $33,000, Pine Ridge pursues the owner directly.